2025 (7) TMI 127 - AT - Income Tax

Correct head of income - income arising from the sale of land held as fixed asset and not stock-in-trade - business income or long-term capital gains offered to tax @ 20% - AO has observed that the activity of the assessee is spreading over more than one year and a sole object of acquiring land was to sale it at a higher price to earn profit and he determined the profit earned from the sale of 29597 sq. ft. of land during FY 2014-15 and made an addition on account of business income from the sale of land. HELD THAT - Looking at the audited balance sheet as filed by the assessee we find that the assessee had purchased and acquired the said land in FY 2012-13 measuring 115203 sq. ft. and showed it under the head fixed asset in its audited balance sheet. It is further pertinent to mention here that immediately preceding year (AY 2014-15) the assessee had sold a portion of land and offered the same for tax under head capital gains @ 20% and that can be verified from the computation of income for AY 2014-15 submitted by the assessee along with ITR audited books of account. We find substance in the argument of the assessee that the department ought to follow the rule of consistency as in the present case department has accepted the sale of a portion of such land as sale of fixed asset and accepted the gains to be offered @20% taxability under the head capital gains. Accordingly the appeal of the assessee is hereby allowed and the addition made by the AO confirmed by the Ld. CIT(A) are hereby directed to be deleted. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the income arising from the sale of land by the assessee should be treated as business income or as long-term capital gains.
• Whether the land sold by the assessee was held as a fixed asset or as stock-in-trade.
• Whether the principle of consistency in tax treatment should apply, given the prior acceptance by the department of similar transactions as capital gains.
• The relevance and applicability of precedents concerning the characterization of land sale income as business income or capital gains.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Characterization of income from sale of land as business income or capital gains

Relevant legal framework and precedents: The determination of whether income from sale of land is business income or capital gains depends on the nature of holding and intention of the assessee. The Supreme Court decisions in P. M. Mohammed Meerakhan vs. CIT and Karanpura Development Company Ltd. vs. CIT were relied upon by the Revenue to support treating such income as business income where the activity amounts to a trade or business of dealing in land.

Court's interpretation and reasoning: The AO and the CIT(A) observed that the assessee had acquired a large land parcel and engaged in systematic development, dividing the land into plots and selling them over more than one year. This was taken as evidence of a business activity with the intention to earn profits through trading in land. Accordingly, the income from sale of a portion of the land was treated as business income and added to the total income.

Key evidence and findings: The AO relied on the audit report and the pattern of transactions, noting the purchase in FY 2012-13 and subsequent sales during FY 2014-15. The assessee sold 29,597 sq. ft. of land in six transactions during FY 2014-15. The assessee's balance sheet showed the land as a fixed asset. The assessee had not shown any business income from real estate in prior years but had declared interest income from unsecured loans.

Application of law to facts: The Tribunal examined the facts that the land was shown as a fixed asset in the balance sheet and that in the immediately preceding year (AY 2014-15), the assessee sold a portion of the same land and offered the gains as long-term capital gains, which was accepted by the department without any addition or recharacterization as business income.

Treatment of competing arguments: The Revenue argued that the intention of the assessee was to carry on business in land dealing, relying on the AO's observations and Supreme Court precedents. The assessee contended that the land was held as a fixed asset and that the sale proceeds should be taxed as capital gains at 20%. The assessee also emphasized the principle of consistency, pointing out that the department had accepted similar sales in the previous year as capital gains.

Conclusions: The Tribunal found merit in the assessee's argument that the department must follow the rule of consistency. Since the department accepted the sale of part of the land as capital gains in the immediately preceding year, it could not treat the sale in the current year as business income. The facts of the present case were distinguishable from the precedents cited by the Revenue.

Issue 2: Whether the land was held as fixed asset or stock-in-trade

Relevant legal framework and precedents: The classification of an asset as fixed asset or stock-in-trade is critical in determining the nature of income. Fixed assets are held for long-term use and capital gains arise on their sale, whereas stock-in-trade is held for sale in the ordinary course of business, generating business income.

Court's interpretation and reasoning: The Tribunal noted that the assessee consistently showed the land as a fixed asset in the audited balance sheets for several years, including the years before and after the relevant assessment year. The sale transactions were limited in number and value, and the assessee's profit and loss accounts did not reflect any real estate business income, only interest income from unsecured loans.

Key evidence and findings: The audited balance sheets and profit and loss accounts for FY 2012-13 through FY 2014-15 were examined. The land was recorded as a fixed asset, and sales were few and sporadic. The department had accepted the capital gains treatment in the previous year without raising additions or recharacterizing the income.

Application of law to facts: Given the consistent treatment of the land as a fixed asset and the limited nature of sales, the Tribunal concluded that the land was not stock-in-trade. The sales were not part of a business of dealing in land but were disposals of a capital asset.

Treatment of competing arguments: The Revenue relied on the AO's view that the land was acquired with the sole object of resale for profit, supported by the division of land into plots and systematic sales. The assessee argued that the land was held as a fixed asset and that the sales were isolated transactions, not part of a business.

Conclusions: The Tribunal accepted the assessee's contention, emphasizing the consistent accounting treatment and prior acceptance of capital gains tax treatment by the department as decisive factors.

Issue 3: Application of the principle of consistency in tax treatment

Relevant legal framework and precedents: The principle of consistency mandates that a taxpayer and the department should maintain uniformity in treatment of similar transactions across assessment years unless there is a valid reason to deviate.

Court's interpretation and reasoning: The Tribunal highlighted that the department had accepted the sale of a portion of the same land as capital gains in the immediately preceding assessment year without any addition or recharacterization. The Tribunal held that the department cannot "blow hot and cold in the same breath" and must adhere to the principle of consistency.

Key evidence and findings: The assessment order for AY 2014-15, the audited accounts, and the ITR filed by the assessee were examined to confirm that the gains were offered as capital gains and accepted by the department.

Application of law to facts: The Tribunal applied the principle of consistency to hold that the department's treatment in the current year should align with the prior year's treatment, absent any new material facts or changes in circumstances.

Treatment of competing arguments: The Revenue did not dispute the prior acceptance but contended that the facts in the present year justified a different treatment. The Tribunal found that the facts were not materially different to warrant departure from prior treatment.

Conclusions: The Tribunal directed deletion of the addition treating the sale proceeds as business income, thereby allowing the appeal.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Keeping in view the above discussion, we find substance in the argument of the ld. Counsel of the assessee that the department ought to follow the rule of consistency as in the present case department has accepted the sale of a portion of such land as sale of fixed asset and accepted the gains to be offered @20% taxability under the head capital gains."

Core principles established include:

• The nature of income arising from sale of land depends on the holding pattern, intention, and treatment in accounts.
• Consistent accounting and tax treatment of similar transactions in preceding years is a significant factor in determining the nature of income.
• The department cannot arbitrarily change the character of income from capital gains to business income without justifiable reasons.
• Systematic development and sale of land over multiple years may indicate business income, but such inference must be supported by consistent evidence and not contradicted by prior accepted treatment.

Final determinations:

• The income arising from the sale of land in AY 2015-16 shall be treated as long-term capital gains and not business income.
• The land was held as a fixed asset and not stock-in-trade.
• The addition made by the AO and confirmed by the CIT(A) treating the sale proceeds as business income is deleted.
• The appeal filed by the assessee is allowed accordingly.